The latest McKinsey Global Institute report (PDF), released yesterday, focuses on the importance of cities to economic growth and development. A fifth of the world’s population live in just 600 cities, generating over 60% of the world’s GDP. Over the next fifteen years, huge numbers of people in the developing world will migrate to cities, creating enormous economic progress. Even accounting for the great leaps in communications technology in the last few decades, cities allow for much deeper divisions of labour and agglomeration economies (such as economies of scale and complexity).

The report emphasises the shift in the world’s wealth from the Western world to the East and South:

Over the next 15 years, the makeup of the group of top 600 cities will change as the center of gravity of the urban world moves south and, even more decisively, east. One of every three developed market cities will no longer make the top 600, and one out of every 20 cities in emerging markets is likely to see its rank drop out of the top 600. By 2025, we expect 136 new cities to enter the top 600, all of them from the developing world and overwhelmingly (100 new cities) from China.

The top 600 cities will generate around 60% of the economic growth in the next 15 years – the bulk of which will be in poor countries. As Tom discussed last week, there is no fundamental reason for this to cause alarm. Growth is a positive sum game, so the urbanization and economic development of the East is good for them and good for us.

But there is still a big potential danger to British cities and others in the Western world. So far, economic centres like London have used their wealth, greater quality of life and political stability to avoid losing businesses to the developing world. As the cities of the East and South catch up, we’re not going to be able to rest on our coattails – bad economic policies (like heavy regulation) will become untenable, and the best people and businesses will leave.

Within the UK, great industrial cities of the north like Sheffield, Newcastle and Liverpool have decayed, as regulation designed to suit London and the South imposed economic sclerosis on those places. In a flatter world, where Guangzhou rivals Tokyo and Mumbai rivals London, we can’t afford to rest on our laurels.

City-based localism that allows cities to set their own rules and regulations in order to attract talent is urgently needed both to revitalize the north and to preserve London’s status as a world economic centre. Fifteen years is a short space of time – policymakers need to think radically about how to free cities from central government so that we reap the benefits of urban growth.